Competition in a structurally changing pharmaceutical market: Some health economic considerations

Economic analysis of health care necessarily includes pharmaceutical therapy as one production factor of health. Recent research shows that within the available production factors for health the highest productivity increases have come from technological advances in drug therapy. Future productivity increases will be influenced by the way in which pharmaceutical markets are organised. Empirical findings show that short-term cost containment measures act against an adequate intertemporal allocation and increasingly more nations disagree with the international allocation of research costs.

The mechanism of pricing of pharmaceuticals is available as a means to allocate financial resources. However, cost-orientated pricing is not wholly practical for research-based companies where a high proportion of costs cannot be allocated to individual products. However, it is argued that heterogeneous competition between research-based companies during the patent life-time and homogeneous competition of non-research-based companies after patent expiration protect the patient from exploitation. Empirical data indicate that the coexistence of both types of competition has worked quite satisfactorily in the past.

The combination of the tendency of cost-containment measures to concentrate on drug prices and the present phase of the industry may have an effect which, in the long run, works to the detriment of society. The contribution of health economists should lead to a policy in which short-term and politically opportune cost cuttings do not dominate but one which results in long-run technical and economic production of health.